January 2008

Retirement: let’s look at the facts

Here’s a new proverb for this RRSP season: Tell me what you’re doing with your money today and I’ll tell you what kind of life you’ll be living tomorrow.

Dream or not, for each one of us, retirement is inevitable. Sooner or later, we won’t be able to work (or work enough) to earn all the income we need. We’ll have to rely on our savings.

Let’s be honest. For most Canadians, things are not too rosy in this regard. According to Statistics Canada, more than two-thirds of Canadians don’t systematically contribute to an RRSP. And, on average, those who do use only 8% of their contribution room. On the whole, Canadians save only 1.5% of their income for retirement. As a result, they’re letting nearly $500 billion dollars in unused contribution room go to waste, that is, $500 billion less to finance their retirement. And that’s not even taking into account the return that money could generate.

From a high-level point of view, these figures are alarming. So, let’s look at them from a more personal viewpoint and make sure we have an adequate strategy.

Taking stock
Ask yourself this very simple question: how am I doing right now with my retirement savings plan? Problem is, as shown in the diagram below, retirement has become a paradoxical reality. In general, we’re starting our professional life later than before, we plan to retire sooner, and, to top it all, we can expect to live longer. As a result, we find ourselves with fewer active years during which to set money aside than years of retirement. The exact opposite of what our parents experienced.

Less work, longer retirement: an impossible equation?
25-30 yrs old
Active life cycle
55-65 yrs old
Retirement cycle
90-95 yrs old

So, it’s important to properly situate yourself in your active life cycle and to have a savings plan that takes into account the time you have left to build the capital you’ll need. The table below provides a good starting point:

Every retirement savings scenario is different, which is why a large number of simulation tools are provided. The most sophisticated are reserved for financial representatives, but the average citizen should consult CompuPension, a comprehensive tool provided by the Régie des rentes du Québec.

Here’s a look at what these tools can tell you …

Careful, ladies!

One last word: Ladies, be especially careful! Unfortunately, women are often paid less than men … but they have a longer life expectancy. This probably means less savings and less retirement income … with more years to live.

Regardless, the numbers provided here show just how important it is to plan for retirement. And there’s no better time to make projections than right now, during RRSP season!